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The chart above illustrates the potential relationship between the Federal Reserve’s QE programs and the S&P500. With the seemingly endless supply of free money, the drastic correlation between printing and pumping, how would this all end? What will the FED do with its balance sheet once it is all over? Will it have to just keep printing in order to sustain this?

To put it all in a bit more perspective, I thought it would be interesting to take a look at the US Gross Federal Debt and the Federal Reserve’s balance sheet. There are 2 things that really jumped out to me.

First, to see the QE program in this light is absolutely frightening. The parabolic rise in the amount assets (or liabilities) that the FED now holds is truly amazing. And second, to think about how much debt was created from the mid 1980’s to 2008 and who was buying it. We certainly were not. For nearly 30 years, the FED’s balance sheet was a flat line and then it exploded in 2008 as the QE programs accelerated. At the same time, you can clearly see the Federal Debt trend line turn dramatically turn upward. We print we buy. To think that we printed and created this massive amount of debt is something to be concerned about for sure and should weigh clearly on the mind of investors.

So while in the first chart we speculated about the S&P 500, here I would have to speculate what is going to happen to the Federal Government when all of these programs end. What will happen to all of this debt and our obligations to pay for it when interest rates rise as we have seen over the past few months. With some calling for rates to close at over 3% by year’s end, I can hardly imagine how we will ever begin to pay for all of this printing and pumping. I can only assume by the Fed’s prior actions, that the next leg up for the S&P 500 will be when they announce that the taper has now been taken off the table. And with that, the ruse is still alive and the and the markets will soar to  even higher levels.

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Ralph M Dillon

Category: Federal Reserve, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Federal Reserve Balance Sheet Revisited”

  1. Vivian Darkbloom says:

    “With the seemingly endless supply of free money, the drastic correlation between printing and pumping, how would this all end?….To think that we printed and created this massive amount of debt is something to be concerned about for sure and should weigh clearly on the mind of investors.”

    I don’t get this. In fact, Ritholz seems to have gotten this backwards. The Federal Reserve is not creating debt—Congress is. The Federal Reserve is buying Treasuries, quite arguably driving down interest rates, particularly on Treasuries. This reduces the debt, at least in the short term– that is, the term covered by these graphs.

    I suppose one could argue that if the Federal Reserve did not actively purchase Treasuries driving down interest rates this would force Congress to cut their spending or raise additional tax revenues earlier than they otherwise would need to due to the higher rates and servicing costs. But then again, we have a very significant crowd that Barry seems to pal around with that argues Congress is not spending enough… Were it not for Federal Reserve, the “need” in the eyes of those folks for more *fiscal stimulus* would be even greater.

    That’s not to say that the size of the Federal Reserve’s balance sheet is not frightening or that there will be a happy ending. Eventually, someone else is going to have to soak up those Treasuries. It is quite possible that this will end with significantly higher inflation the purpose of which will be to reduce the real value of the debt Congress, not the Federal Reserve, has racked up.

  2. ByteMe says:

    Seems like a natural outcome for a Fed that is run by the largest banks and their bank executives who are paid with a lot of stock options. Support the market! Support our bank!

    Just like the NSA… no one seems competent enough to question it and stop it. Instead the political hacks fight over whether to allow people to get health insurance while calling it something else entirely.

    Where’s Teddy Roosevelt when you need him? Dead, you say?

  3. Moss says:

    I don’t see how the Fed can even consider selling. Since the mere mention of buying less spiked rates so much the Fed has backed off. Clearly the game now is all about front running the Fed.

  4. constantnormal says:

    I like to look at this as the Fed stepping in to replace the worthless (toxic) assets that were created in the run-up to the housing sector’s denouement with assets that arguably have value … how will they unwind it?

    Very slowly, over many decades, across many boom & bust cycles …

    Perhaps (probably) things would have been different if we had allowed the system to work and restructured (broke up) the big banksters instead of clinging to the status quo. But that is an alternate reality, not the one in which we exist. Maybe the Fed will stumble over the course of the years to come, or some lunatic will be made Fed chairman and attempt to quickly change things … then we will get to revisit the opportunity to restructure the banking system.

    • constantnormal says:

      I coulda worded that better … let’s try changing “replace” to “balance” or “offset” … hopefully that conveys the right amount of fuzziness in my thinking

  5. constantnormal says:

    Is it “money” if it does not circulate? The monetary velocity [] would seem to indicate that the stimulus provided by such an injection of “money” has not occurred … just raising the question … monetary velocity oughta fit in with any view of what is happening here, I don’t think we can ignore it and only look at balance sheets.

    A company with a tremendous balance sheet isn’t much of a company if the sales are zero/tiny – it’s more of an undeveloped asset, awaiting the right PE buyout …

  6. Concerned Neighbour says:

    I consider it highly unlikely that the Fed ever sells. There is a wide chasm between reinvesting all principal AND flooding “markets” with $85B per month, to starting to reduce the balance sheet. Talk to me when they’re even willing to reduce the flow by one penny.

    As to the debt, well, that’s a topic no self-respecting financial journalist is willing to touch, apparently. It falls under the category of “fundamentals”, and we all know they are now irrelevant. We have been conditioned to invest solely on what the central bankers do. And hey, shouldn’t that make us feel secure? After all, they have such a great track record of forecasting/moderating the economy. Hell, I feel like going out and buying a whack of 20+ P/E stocks with negligible revenue growth right now!

  7. BenE says:

    This is all wrong. I’m no expert but these graph shows “reserve balances” which are not total central bank liabilities but just the amount banks have decided not to lend and park at the federal reserve instead.

    If the graphs showed total fed liabilities, the part from 1980 to 2008 would also be constantly growing but that is normal and simply reflects the growing amount of money needed in a growing economy.

    There is a spike that starts in 2008 in reserve balances that would also show up in a total liabilities graph. This spike can entirely be explained by hitting the zero lower bound and doing QE. It reflects the fact that at the zero lower bound commercial banks are not lending normally and central banks, through QE, are taking over a part of their role so assets end up on the central bank balance sheet instead of in commercial bank’s balance sheet. Usually bank reserves would be multiplied by ten through lending and the money multiplier but since lending and the multiplier is not happening the central bank has to put out up to ten times the money to have the same effect on the money supply. These excess reserves then simply remain idle on banks’ balance sheets.

    This is not debt in a conventional sense, certainly not something that ever has to be repaid. This is just a measure of how much money people and banks keep in their accounts and how much the fed has made available for banks to lend out.

    The large stock of reserves could in theory reflect possible future inflation or future high interest rates but the relationship is a paradoxical one. If central banks printed more and created more inflation now, this could actually prevent future inflation by discouraging people and business from stockpiling idle cash that could later flow too quickly in the economy. Banks stockpiling reserves doesn’t matter much because the feds can instantaneously yank these reserves out of the system whenever they want thus preventing banks from over lending in the future.

  8. pekoe says:

    There is a relationship between the red and blue lines on these graphs? Seriously?? Maybe if you look at only a tiny part of the graph and overlay that to a pre-conceived conclusion.

  9. 4whatitsworth says:

    The only genuine effect I see with QE is that it reduces the amount of debt for others to purchase therefore it reduces interest rates. As long as the government does not sell this debt creating more supply interest rates will only adjust to their market rate when QE stops. This could theoretically go on until the dollar begins to plummet increasing costs of imports. This may increase jobs and inflation here in the US. There are of course limits to job creation here at home like the ability to obtain raw materials and skilled labor.

    Perhaps the master plan is to reduce the value of the dollar making imports more expensive and hopefully creating jobs and inflation here at home. I wonder if it will ever work?